Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Tuesday, January 29, 2008

The United Kingdom has often been at the forefront of privatization, and it has taken another step in that direction. Private businesses can now deliver their own diplomas in lieu of end of studies diplomas typically delivered by state sanctioned schools (A-Level). Of course, such businesses need to be accredited as well, and the first batch includes a low cost airline (FlyBe), a railway company (Network Rail) and McDonald's. Yes, McDonald's.

The experience you accumulate from flipping burgers to managing a shift can now count towards a diploma that is supposed to open the doors to a university education. That in itself is not new, as some universities are willing to accept an appropriate work experience as a replacement for a high school degree (in US terms). The difference here is that degrees are supposed to be transferable. An accredited A-Level degree is an A-Level degree, whether it is from Eton or McDonald's. Universities are not so sure, however, claiming that "McQualifications" have a much too narrow focus and are academically not sufficiently rigorous.

This brings us closer to the US situations, where universities are essentially free to choose whatever they want for admission criteria, and there is plenty of evidence that a (reputable and good) high school diploma is only a minor part for admission to, say, Ivy League schools. Isn't public service, leadership and sports achievement that potential students are suppose to exhibit essentially the same as the hands-on experience that McDonald's and others would document?

I suppose the point of the experience in the United Kingdom is the break the monopoly educational institutions have in delivering diplomas. Documenting other aspects of human capital that pure academic work is certainly of interest, much like apprenticeship has done for centuries in Germanic countries. But can recommendation letters from employers not do the same? And how can one distinguish the quality of diplomas across the soon numerous providers? In no time, private entrepreneurship will yield a firm that will provide a uniform test, call it SAT, based on some rigid and easy to verify criteria. This new test will then for all practical purposes replace the plethora of diplomas that have themselves replaced the uniform diploma the government was providing before. Would then anything have changed, except some confusion? And as the United States show, would this not yield a private monopoly instead of a public one? Have we really gained?

Monday, January 28, 2008

Economists often puzzle about why people, in particular poor people, buy so many lottery tickets. Think about it, we generally consider that people are averse to risk, and lotteries certainly do not reward risk, as a substantial part revenues are essentially taxed away. So why do people buy lottery tickets?

John Laitner argues that this is because of the means tests poor people face: buying a lottery ticket will not make them any poorer as they will still stay eligible for social assistance. If they win, however, they can escape poverty for good. Thus, they win in expected terms. In a sense it is about the dream of escaping poverty, and it is close to free.

John Morgan argues that lotteries, as long as they help in providing a public good, can replace efficiently taxation. Lotteries work better that voluntary contributions. John Morgan and Martin Sefton confirm this in a laboratory environment. Rob Moir, also in experiments, shows that this reasoning may collapse if there other public goods to be financed.

Friday, January 25, 2008

Markets and politicians panic about the huge write-offs major financial institutions have to make in the face of this subprime mortgage mess. I am all for market readjustments from time to time. I do not think this one is particularly bad, as it was pretty much expected that subprime mortgages have a higher risk. What worries me more is what just happened in France.

A single broker at Société Générale, a major French financial institution, managed to generate a trading loss of US$7,000,000,000 (seven billions). And according to Société Générale, he did that all by himself. What do I learn from this? That a financial institution that has had a particularly good reputation about its management, audit and control practices could not detect $7 billion being wagered by one of its employees, that no one else knew about it. What about all the other, less reputable institutions? Imagine the risks there.

Now, would this employee just be a scapegoat? If so, this would be a very poor choice by management, as the fact that a single employee can do so much damage shakes my confidence in the institution more than if fraud was committed by several.

Banking circles worry quite a bit about systemic risk. It is time to reevaluate the idiosyncratic risk, especially as it can get into proportions that can measure up with systemic risk.

Wednesday, January 23, 2008

Checking your email for the latest NEP reports regularly yields some nice gems. I have been wondering lately why households hold so much credit card debt, given the high interest rate. A recent paper by Irina Telyukova looks at an even bigger puzzle: why would households at the same hold significant credit card debt and sizeable liquid assets? A surprising 27% of US households fall into that category.

Telyukova's paper argues that one reason you may want top hold these liquid assets is that they are useful for transactions that cannot be performed with other means. Sounds reasonable, even trivial. The big question is whether this is quantitatively important at all. The paper argues that the proposed model can account for 73% of the puzzling households and for 55% of their liquid assets. Thus, the credit card debt puzzle is rational. Who knew?

Tuesday, January 22, 2008

The RePEc blog recently had a post describing some of the roadblocks it faces in exctracting references for its citations analysis. I found the following quote intriguing:

We are working with some publishers that kindly provide us with metadata about references. We try to get on board as many publishers as possible but unfortunately not all of them are willing to collaborate with us at this time.

Publishers typically references in articles on their website, so I found it somewhat puzzling that they would not provide those references to RePEc, especially as their articles would then be listed on the pages of those they cite. Do not publishers want links to their material? So I investigated to determine which publishers are those that do not want to collaborate with RePEc. While coverage seems to be slim, but existent with some publishers, one that seems to provide nothing is the major one that shares an initial with Evil and Empire.

Already revilled for its pricing practices with libraries, for its aggressive buying of rival presses and for its dangerous market power, the Evil Empire now wants also to corner the commercial citation business, having launched its own product. And of course, boycotting RePEc is part of the strategy. It still participates in the other activities of RePEc, because it is unavoidable, but helping this worthy cause and the exposure of its journals, no.

Monday, January 21, 2008

Many bloggers are contributing to the debate on the fiscal stimulus the Bush administration is trying to push through. Let me add my grain of salt and discuss the effectiveness of this measure under various scenarios. I bypass here the question whether a stimulus is needed at all.

Given the current state of federal government finances, I take that this stimulus would be temporary, which is fairly obvious, and that it would need to be financed by further debt: it is not accompanied by a reduction in government expenses. This debt will have to be paid back at some point, through higher taxes. Thus we are in the typical case of a shifting of taxes through time, the basic premise for the Ricardian Equivalence.

The Ricardian Equivalence states that, under certain conditions, the intertemporal substitution of taxes has no impact on consumption and interest rates, and thus on other real macroeconomic aggregates except savings and government debt. Indeed, households realize after a tax cut that they will have to pay to pay higher taxes in the future, and thus save the tax cut for the future tax increase. They do so by buying the very bonds the government is issuing to finance the tax cut.

Now, this very strong theorem holds only under some stringent conditions, basically that welfare theorems hold (no distortionary taxation, complete financial markets, no monetary non-neutralities, etc.). These conditions are unlikely to hold in reality, so the empirical question is whether a tax cut does increase consumption or not (and the not includes a decrease). The literature is far from settled on this, but the two Bush administration have given several natural experiments to study this.

Case 1: Bush the elder implemented a stimulus package in 1993 that reduced the tax withheld from salaries, to be compensated by a lower tax refund the following year. A perfect experiment for the Ricardian Equivalence. According to Shapiro and Slemrod (1995), 43% percent of households spent the supplementary temporary income.

Thus, the Ricardian Equivalence does not seem to hold, but tax refund are clearly not the miracle measure to encourage consumption. Those households that actually spent the tax rebate where typically credit constraint: they wanted to consume more but could not for some reason, and the cash infusion relieved them from their constraint. For example, a young person, who would want to consume more but is unable to borrow against future income. Or a temporarily unemployed who, again, cannot find credit.

This means that for the fiscal stimulus to be most effective it should be directed towards those that are the most likely to spend it right away: the poor, the homeless, the students. Or the compulsive buyers. But not tax payers. It should not be a tax rebate, as those that pay taxes are those that have higher incomes, and are less likely to be financially constrained and thus consume.

Friday, January 18, 2008

Now that soon to be PhDs are flying across the continents to impress audiences and will in a few weeks ponder which offers to accept, let me give some little pieces of advice:

Do not go for the most prestigious job. Your advisor may really want you to take this top school job to have one more medal on his chest, but think about yourself. What quality of life do you really want? The higher ranked the department, the more stressed you will be, and the least likely you are to get tenured.

Think not just where you want to work, but also where you want to live.

Listen to your spouse. The divorce rate is too high among assistant professors, or many end up moving anyway as they finally listen to their spouse.

Industry jobs are more lucrative, but they are also more stressful, and much more constraining in terms of topics and hours.

Consider it: you may like teaching.

In summary, think more about the life you want to live, and less about the work you want to work.

Thursday, January 17, 2008

We already knew that it pays to be beautiful, so it should not be a surprise that a study by Das and DeLoach finds that it pays to spend time to groom yourself. The surprising finding is that it pays much more for men.

Maybe it is because women in general groom, so there is no particular advantage in taking care of oneself. Very fez men do this, so there rare ones that do stand out and reap the benefits. Looking at economists, I doubt this applies, though. Many of the top economists clearly have regard whatsoever about there appearance. But then, they are not at business schools, where it is all about the show.

Wednesday, January 16, 2008

I just do not understand why so many people insist on emailing in a Microsoft Word document a text that could have just as well be cut-and-pasted straight in the message subject. Why make everybody's life more complicated?

The problem is the following: Word documents are coded (intentionally?) in such a way that often only a version equivalent or superior to the one that wrote the document needs to be used for reqding the document. The problem has been exacerbated with Word Vista, which saves documents in an entirely new format! If you want to be able to reqd all the documents sent to you, you always need to have the latest version on your computer.

Why would Microsoft make its customers endure this? Word is a product that fundamentally does not need updates, thus would generate minimal sales now that everyone has it. So Microsoft adds some gimmicks, calls it a new version, and then makes its format in some way incompatible with previous ones. The incompatibility seems subtle, as the conversion success rate seems to decline the larger the difference between versions. This just looks like a scheme to fool people into buying more recent versions of Word bloated with useless features.

The policy recommendation: never send Word files. Convert them to PDF (or text) first. Or much more simply, do not use Word at all.

Saturday, January 12, 2008

In some sense, I offer on this blog reviews on event or policy from an economic perspective, or plainly reviews of economic articles or books. But none of that can beat the quality reviews customers offer on Amazon. Here is a sample.

Wednesday, January 9, 2008

After his shock therapy policy went awry in Russia, Jeff Sachs' new credo is to solve World poverty, and specifically African poverty, by eliminating malaria. While it is clear that it is a very serious disease, one may ask why so much relies on this one disease.

Jeff Sachs offers the answer himself in several papers, the most prominent ultimately published in The American Journal of Tropical Medicine & Hygiene (pdf) (one can wonder whether this paper would have passed peer review in an Economics journal): in terms of growth or GDP, his cross-country regressions show a very substantial cost, in the order of 1.3% growth points or 40% of the GDP level. His latest work corroborates what he has saying alongside Bono and Angelina Jolie on MTV for a long time: controlling malaria is cheap, about US$4 a person at risk.

The typical prevention that is advocated is the bed net that is treated with a substance that disrupts the cycle of the disease. Bed nets are relatively cheap and effective, as long as you stay under them. Jeff Sachs' goal is to get everyone under a bed net, and he has drummed up public support for bed net distribution campaigns in several countries. This initiative has recently come under fire, as discussed in this Science article: these distributions of free imported bed nets kill nascent local bed net industries, and once the campaigns are over, no one is there to take over. This also highlights the long standing issue of aid and dependence.

A second issue is that Sachs presumes that malaria is exogenous to the level of development. What if it is endogenous to poverty? Then, one should deal with poverty first to get rid of malaria, and not deal with malaria to get rid of poverty. The truth is probably that they are both endogenous to each other. Encouraging a local market for bed nets to thrive, instead of carpet bombing it with bed nets, is probably the better way to go.

Tuesday, January 8, 2008

The Federal Reserve Bank of Minneapolis just published a fascinating book about depressions. It covers not just the US Great Depressions but also severe and prolonged downturns elsewhere during the same period or other periods. Depressions are defined generously, as episodes of below average growth over an extended time are also included.

The classical explanation of the US Great Depression, according to Milton Friedman and Anna Schwartz, was that the Federal Reserve severely messed up in response to the 1929 crash, withdrawing liquidity instead of flooding the market with money. Central banks have learned since, seeing their reactions to modern stock market crashes. But while we now understand that reducing drastically the money supply can have adverse consequences on the economy, how could this last for so long? After all, don't we all agree that money is neutral in the long run? And in fact, monetary aggregates and productivity were back to normal by 1933 anyway. So something else was amiss.

Harold Cole and Lee Ohanian challenged convention wisdom by stating the answer has nothing to do with monetary policy. Using theory and historical data, they came to the conclusion thatthe real culprit was to a large extend the New Deal. By granting more monopoly power on the labor market, it essentially shut down employment. Generations of school children have been fed the story that the New Deal was the policy that brought the country out of the Great Depression. The New Deal made it worse. The war effort overturned it.

The Minneapolis Fed book is a compendium of the research that has followed the Cole and Ohanian strategy to study other depressions. Not all contributions uncover what makes a depression start and stay so deep for so long. But it is a fascinating read.

Monday, January 7, 2008

Found on the Borjas blog this disturbing article about the use of research assistant in academia, and in particular in Economics and Law at Harvard. Or should I rather say overuse of research assistants, as they seem to be doing so much work that the author does not even know about it, but still signs it off without attribution.

This would be fine in a corporate environment, where "underlings" are rewarded through merit pay and promotions. In an academic environment, research assistant are poorly paid and merely acknowledged (if that). Well, they may also obtain recommendation letters. But the fact is that some faculty here seem to attract much more credit than warranted. This can be dangerous, witness the plagiarism cases related in the article, or the Fabrikant case.

From my own experience (not Harvard), research assistants are over-rated. Teaching them how to do things properly, coaching them through the work, and then checking their work, sometimes redoing everything, just seems to be a huge waste of time and effort. I just cannot believe the ethics of those that rely so much on their assistants, do not seem to check their work, and then do not even offer co-authorship. But anyway, on the occasion that I have research funding, I now prefer to give students a scholarship for writing their thesis without other pressures. This way, everyone is happier.

Wednesday, January 2, 2008

RePEc just released a list of the most cited recent articles in Economics (or at least from its data), recent being defined as published in the last five years. Are these the future classics? Are these the papers that will lead to Nobel Prize? I do not see anything that really strikes me. The only marginal candidate I see is Anderson and van Wincoop's "Gravity with Gravitas." Is there really nothing groundbreaking written nowadays?